If HUD Must Close, Let’s Keep Its Best Programs

April 24 (Bloomberg) -- Mitt Romney suggested last week
that the Department of Housing and Urban Development “might not
be around later.” Predictably, this set off a minor firestorm.

Eliminating every HUD program would be unwise and inhumane,
but the best ones could be saved even if the department were
shuttered. If we want to take Romney’s suggestion seriously, we
should start by designing a shutdown plan, under which HUD’s
most critical functions, such as housing vouchers and the
Federal Housing Administration, remain operational.

In my last column, I argued that the Romney campaign could
do the U.S. a signal service by presenting a serious path toward
fiscal responsibility; closing departments might help achieve
that goal. HUD has five major functions: tenant-based housing
vouchers, mortgage assistance, support for housing supply,
community-building efforts (such as community development block
grants and empowerment zones) and more general programs for
housing and urban affairs.

The U.S. spends about $19 billion a year on the rental
assistance program known as Section 8 housing choice vouchers,
which is the largest line item in HUD’s budget. Romney’s father,
George, helped lay the groundwork for this initiative when he
served as HUD secretary during the Nixon administration.

Housing Help

This program now helps about 2.2 million households pay
rent. Vouchers are administered by local housing authorities,
which operate under HUD rules. Recipients must earn less than 50
percent of the area’s median earnings and 75 percent of the aid
must be distributed to families whose income is less than 30
percent of the area’s median. The local housing authority sets a
payment standard, and voucher recipients are expected to spend
30 percent of adjusted gross income on rent and utilities. The
difference between that 30 percent payment and the local
standard is covered by the voucher.

Does this make sense? Compared with the public housing
programs it replaced, the voucher program is a triumph. It
enables choice, is far less wasteful and, unlike large housing
projects, doesn’t automatically create clusters of poverty. One
recent study argued that the program’s benefits far exceed its
costs, in part because vouchers improve education outcomes.

The best evidence of vouchers’ long-term impact is provided
by a randomized evaluation called Moving to Opportunity.
Although that study found that vouchers don’t improve youth
educational outcomes or economic results for adults, it showed
that recipients live in significantly better neighborhoods, and
are less depressed and less obese. Vouchers are no magic bullet,
but eliminating them would cause enormous hardship to millions
of poorer Americans.

Nonetheless, the vouchers program does have flaws that
could be remedied through restructuring. It costs about $1.5
billion to administrate (this isn’t surprising given the role of
local housing authorities, which check any proposed housing unit
for health and safety concerns). With the radical improvements
in the U.S. housing stock, however, this function is probably no
longer necessary.

In addition, there are long waiting lists for vouchers,
which makes receipt somewhat random. For every $1 of extra
income that a recipient family receives, its voucher declines by
30 cents, an implicit tax that deters working by the poor.

Finally, though vouchers are supposed to be mobile, there
are longstanding complaints about the difficulties of
transferring them from one housing authority to another.

Under New Management

Here are two proposals for a post-HUD voucher system. The
simpler method is to transfer the operation to the Treasury
Department and the tax code. In this scenario, every poorer
family would be eligible for rental assistance, based on income
and payment standards in their area. Families would receive a
check or tax credit from the Internal Revenue Service that is
equal to the difference between their documented rental payments
and their ability to pay, as long as their rental payments don’t
exceed the local payment standard.

This mechanism could radically reduce administrative costs,
enhance mobility and increase fairness. If we wanted to reduce
the implicit tax on those who work, we would need to design the
program to resemble the earned income tax credit, which doesn’t
decrease as much as earnings rise. Voucher quantities would need
to fall. As a result, we would need to implement a gradual
transition to limit the harm to current recipients to keep
spending constant as vouchers became more widely available.

Alternatively, vouchers could be taken over by Health and
Human Services, which could roll them into the current Temporary
Aid to Needy Families, or TANF, program. It makes little sense
to have three separate silos of aid to the disadvantaged (food
stamps, housing vouchers and TANF). Consolidation could ensure
the right form of aid was targeted to the needs of particular
families.

Mortgage-assistance programs should also be maintained,
even if HUD were to vanish. The Federal Housing Administration,
the mortgage insurer for poorer Americans, covered almost one-fifth of home-purchase loans in 2009 and 2010. My co-author,
Joseph Gyourko, argues that the FHA is woefully undercapitalized
relative to its level of risk, with about $30 billion of assets
being held against $879 billion of insured mortgages. He may be
right that the FHA will be “the next housing bailout,” but
historically, the agency’s insurance fee of close to 85 to 90
basis points per year has enabled it to cover its costs.

I share Gyourko’s fears about the FHA, but I have trouble
believing that we would want to eliminate the primary tool for
helping poorer Americans to become homeowners. Ginnie Mae also
bundles and sells mortgages insured by other government
agencies, including the FHA and the Department of Veterans
Affairs, and it has had few problems.

Mortgage Insurance

If HUD were to vanish, then the FHA and Ginnie Mae could
become standalone entities, perhaps joined with the remaining
public portions of Fannie Mae and Freddie Mac. Ideally, they
would be isolated from political influence in an entity that was
charged with insuring mortgages for fees that were high enough
to offset any reasonable financial losses. This entity could be
housed in the Treasury Department, which knows a bit about
banking and the financial system.

HUD’s housing-supply-related functions are an appropriate
place for pruning. The low-income-housing tax credit probably
should be phased out: The program subsidizes construction
everywhere, but that help isn’t needed in most parts of the U.S.
The private sector is perfectly capable of delivering huge
amounts of affordable housing in states such as Texas, and we
don’t really need any more buildings in declining areas, such as
Detroit. Indeed, one study found that public housing crowds out
private housing, so that each new subsidized unit creates only
one-third to one-half of an extra housing unit.

The most expensive areas, such as greater New York City and
coastal California, where local governments overregulate new
construction, could benefit from federal public support for new
construction. When localities overrestrict, they impose costs on
people elsewhere who might like to move in. But any national
supply subsidy, including the low-income credit and project-based housing vouchers, ignores the profound differences across
local markets and can be gradually eliminated.

There is an existing public-housing stock that needs
maintenance, and HUD tends to that task. This responsibility
could be given directly to local housing agencies. Ten-year
phase-out grants can avoid immediate hardship, and push toward a
future in which the federal government is no longer in the
public-housing business.

HUD also has a sizable community-building portfolio,
including community development block grants, but Congress could
direct these funds either to localities or to states that would
have a mandate to transfer the money to appropriate communities.
The principle of these grants was to engender local autonomy,
which makes HUD’s oversight relatively unnecessary.

Moral Leadership

Finally, I am loath to see HUD completely lose its moral
leadership in fair housing. The federal government should have
an officer who is charged with ensuring that the disadvantaged
are treated fairly in housing, and that localities don’t hurt
the country by engaging in excesses of NIMBYism. This function
could be handled with an undersecretary-ranked official at
either Justice or Commerce. In principle, further distribution
of community block grants could be made contingent on good
behavior, as certified by this official.

HUD’s valuable research function could also be taken over
by this new housing official, and would find a natural home at
the Commerce Department. The Bureau of Economic Analysis already
does significant research, which could be integrated with HUD’s
current housing portfolio. Other HUD functions, such as support
for American Indian housing, could be rolled into other
departments, such as Interior.

How much would this reorganization save? At best, a couple
billion dollars a year in administrative costs and perhaps $10
billion in reduced spending on supply-related policies (which
could be eliminated even if HUD survived). Any larger financial
benefits of eliminating the agency would depend on more
conservative practices at the FHA and fewer new projects.

I’d prefer to start by closing the Department of
Agriculture rather than HUD, or at least closing them
simultaneously in a grand bargain under which urban and rural
America lose their representatives in the Cabinet. Of course,
just as with the best parts of HUD, Agriculture’s food stamps
program, which aids more than 46 million people a month, would
need to be put in another department, perhaps Health and Human
Services.

U.S. policy, with its huge highway subsidies and a home-mortgage-interest deduction that bribes people to move from
urban renting to suburban owning, is already stacked against
city life. Yet it isn’t impossible to imagine a sensible post-HUD future, as long as our commitment to the most vulnerable
Americans isn’t radically diminished.

(Edward Glaeser, an economics professor at Harvard
University, is a Bloomberg View columnist. He is the author of
“Triumph of the City.” The opinions expressed are his own.)

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